What is the right and prudent level of spending on service?
Daniel OʼNeill is a director at Navigant Consulting.
Times have changed for electric utilities. The combination of deregulation, mergers, major storms, and widespread outages has shifted the industry's emphasis to reliability. That wasn't always true. Even 20 years ago, the growth of load was adding so much to ratebases and driving such large rate increases that regulators spent a lot of time reviewing plans for capacity additions — and challenging utilities for over-spending. Because of these "prudency reviews," excessive costs sometimes were disallowed as additions to ratebase.
Generation today is deregulated in many states, while many states have excess supply. And concerns about reliability are escalating. Consequently, regulators are focused on whether utilities are spending enough money to ensure quality of service.
Trending, benchmarking, and modeling are three good tests utilities and regulators can use to determine the right amount of spending for the desired quality of service.
Trending
One of the most commonly used tests for spending prudency examines the trend of spending and service levels. Looking back over a specific time period, what has the utility spent on reliability, service, or system integrity? How does that compare to service level and performance over the same time?